Imports and exports—the staples of international trade—may seem like terms that have little bearing on everyday life for the average person, but they can, in fact, exert a profound influence on both the consumer and the economy.
In today’s global economy, consumers are used to seeing products and produce from every corner of the world in their local malls and stores. These overseas products—or imports—provide more choices to consumers and help them manage strained household budgets.
But too many imports coming into a country in relation to exports—which are products shipped from the country to a foreign destination—can distort a nation’s balance of trade and devalue its currency. The value of a currency, in turn, is one of the biggest determinants of a nation’s economic performance.
Imports, Exports, and GDP
Gross domestic product (GDP) is a broad measurement of a nation’s overall economic activity. Imports and exports are important components of the expenditures method of calculating GDP. Let’s take a closer look at the formula for GDP:
GDP = C + I + G + (X −M) where:
C = Consumer spending on goods and services
I = Investment spending on business capital goods
G = Government spending on public goods and services
X = Exports
M = Imports
While all of the GDP formula’s components are important in the context of an economy, let’s look closer at (X – M), which represents exports minus imports, or net exports.
If exports exceed imports, the net exports figure would be positive, indicating that the nation has a trade surplus. If exports are less than imports, the net exports figure would be negative, indicating that the nation has a trade deficit.
A trade surplus contributes to economic growth. More exports mean more output from factories and industrial facilities, as well as a greater number of people employed to keep these factories running. The receipt of export proceeds also represents a flow of funds into the country, which stimulates consumer spending and contributes to economic growth.
How Imports And Exports Affect You
Imports represent an outflow of funds from a country since they are payments made by local companies (the importers) to overseas entities (the exporters). A high level of imports indicates robust domestic demand and a growing economy. It’s even better if these imports are mainly productive assets, such as machinery and equipment, since they will improve productivity over the long run.
A healthy economy is one where both exports and imports are growing. This typically indicates economic strength and a sustainable trade surplus or deficit.
If exports are growing nicely, but imports have declined significantly, it may indicate that the rest of the world is in better shape than the domestic economy. Conversely, if exports fall sharply but imports surge, this may indicate that the domestic economy is faring better than overseas markets. Read more here
By: Leslie Kramer